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Sen. Warren Shows Taking on Wall Street Is Good Politics

The past week has brought a string of stronger-than-expected earnings from the nation’s biggest banks and brokers. But investors focused on the results and forward guidance may be missing a bigger and potentially more important story that's also unfolded in the past week: A series of developments suggesting regulators may be (finally) ready to get tough on the industry.

Most notably, a bipartisan group of Senators led by Elizabeth Warren (D-MA) and John McCain (R-AZ) proposed reviving Glass-Steagall, which from 1933 until its repeal in 1999 forbid commercial banks which receive FDIC support from engaging in investment banking and other risky activities.

In addition, the Federal Reserve proposed new leverage ratios that would force banks to keep at least 5% of capital in reserve vs. the 3% global standard required by the new Basel III standards.

And both Treasury Secretary Jack Lew and Fed Chairman Ben Bernanke addressed the issue of “too big to fail,” admitting more work needs to be done to ensure taxpayers won’t have to pay for future bank bailouts.

“We need to use all the tools in Dodd-Frank to make sure we have ended Too Big to Fail. That's why the rules and provisions that are being implemented this year are so important,” Lew said at the CNBC Institutional Investor Delivering Alpha conference. “If we get to the end of this year and we cannot, with an honest, straight face, say that we have ended Too Big to Fail, we are going to have to look at other options.”

During Q&A after his Congressional testimony Thursday, Ben Bernanke put the timetable at a year from now but said “there’s probably more scope for capital if we’re not comfortable with the status of these firms” designated as systemically important, i.e. ‘too big to fail.’

Whether this talk results in action remains to be seen but the political winds have shifted against the industry, notes Alexis Goldstein, a former Wall Street employee turned ‘Occupy’ activist and creator of the Because Finance Is Boring Tumblr, which uses cat memes to make financial regulation accessible to Main Street.

Sen. Warren has proved “going against the banks is good politics as well as good policy,” Goldstein observes. “There’s potential for the Glass-Steagall bill to move [through Congress] if enough Republicans in the House realize ‘I can raise money off this as well.’”

Of course, that sounds like a very cynical view of how policy gets made, but this is the U.S. Congress we’re talking about and Sen. Warren’s model of raising money by opposing the banks – vs. supporting them – is a potential game-changer in Washington.

The conventional wisdom [among lawmakers] has been ‘I’d rather risk reelection vs. go against the banks because the banks are so powerful,’” Goldstein says. Sen. Warren is “building a really big war chest and proving it’s a model that can raise a lot of money.”

Some might argue whether tougher regulations on banks really are good policy, but it’s hard to argue with the politics. Many Americans understandably view the financial services industry as both the biggest cause of the 2008 crisis and its primary beneficiary: Banks got the bailouts but average Americans are still struggling, with many believing the economy never emerged from recession.